Last month, yet another nasty mortgage-related business practice came to light. Mortgage servicers like Ocwen Financial Corp (NYSE:OCN), as well as banks such as Bank of America (NYSE:BAC) and PNC Financial have been inserting language in mortgage modification contracts with troubled borrowers that precludes the applicants from either suing the institution, or saying or writing anything negative about the servicer or bank.

If the borrowers don't agree, they won't obtain the modification. Shortly after Reuters published a story about this type of quid pro quo, Benjamin Lawsky, the head of New York's Department of Financial Services, launched an investigation into the practice.

Now, Ocwen has announced that it will no longer place such language in loan modification contracts, and will not enforce those in past agreements. Might PNC and Bank of America be next? 

Used in "rare" circumstances
Ocwen CIO John Britti recently told HousingWire that the company only requires such clauses when there is the possibility of legal claims from the borrower, and that those cases are in the minority. According to Britti, those types of situations constitute only "a fraction of one percent of the loans in our portfolio".

PNC commented to Reuters that such gag orders are "part of the consideration we receive for settling the case." Bank of America, like Ocwen, said that non-disparagement clauses are not a normal part of the loan modification process, and that when they do appear, it is usually part of a process that "provide(s) additional consideration to the customer."

A long-standing problem at B of A
There is evidence, however, that this issue has been an ongoing one at Bank of America. Some borrowers, frustrated at the requirement that they never discuss their loan modification experience publicly – or, worse, waive their rights to take legal recourse against the bank – have spoken out over the past few years.

An article from May 2011 on ProPublica tells the story of a borrower who was trying to modify his loan with B of A, but was taken aback by language in the agreement barring him from ever suing the bank over any issues tied to his loan. At that time, a representative from the bank said that Bank of America has stopped using such contract language in 2008, and that the clause must have been mistakenly included.

In 2012, a similar "error" occurred, whereby a couple from Connecticut decided to forgo their loan modification rather than agree to a ban on their ability to publicly state their opinions on Bank of America. The agreement – which included a requirement to remove any past postings on social media or websites – was an affront to their rights to free speech, the couple said.

It is almost certain that many more cases like these exist across the servicing sector, and, due to the toxic mortgages it inherited from Countrywide, Bank of America could have more than its share. And, though the big bank is not alone in this behavior, it has the most to lose. Indicating that such a practice was stopped many years ago, and then having fresh examples crop up after the fact, certainly won't do its reputation any good.

Last summer, B of A and Ocwen were ranked as among the worst mortgage servicers in a J.D. Power survey. Will this year's survey show improvement? We'll know fairly soon. Meantime, addressing this latest discomfiting mortgage practice as Ocwen did will at least help defray some of the reputational damage that is no doubt brewing against Bank of America at this very moment.